Companies can provide a façade behind which fraudulent activities can
flourish. The corporate structure is a potential vehicle for fraud; for example,
they are used to solicit funds from the public, reap speculative profits by
manipulating the value of their issued securities, or to purchase goods and
services when they are insolvent. Companies can be used as a smokescreen behind
which the dishonest are easily able to shelter. Equally the company can be a
victim of fraud. 1

Criminal law can be used to serve a number of purposes in the sphere of
commercial and business fraud. It is most frequently employed as an
administrative adjunct in the field of business regulation.

Great many offences whose object is to protect investors and creditors are
effected by regulating transactions in shares. Most of these offences are
relatively minor. There are also, however, a number of offences that are aimed
at preventing market rigging and other practices that have the effect of
creating false markets in shares, and otherwise undermining the confidence that
investors are entitled to have in the integrity of the markets which they trade.
2

Principal among these fraudulent white-collar crimes is insider trading.
Insider trading was initially the subject of self-regulatory rules only, and was
viewed by many that worked in the markets to be a perfectly acceptable financial
activity. Gradually the perception of the seriousness of the potential damage
inflicted by such conduct began to change, and the need for criminal sanctions
to reinforce the codes was accepted as being necessary. 3

Although illegal, insider trading is increasing all the time. An "inside
trade" occurs when someone misuses confidential information, not available to
the public, to make a trading profit. Such information usually involves pending
mergers and acquisitions, which are supposed to be kept secret from the public
until deals are agreed on. While negotiations take place, those involved are not
supposed to use their inside information to their advantage. 4

Professionals are worried about the eroding standards of trust and honesty,
but they recognize the pervasiveness of insider trading. And they point out that
its not always easy to prove that insider trading has occurred, making the
temptations greater. Some argue, in fact, that insider trading should be legal,
because confidential information would find its way to the public, and the stock
market more quickly. 5

This paper makes an attempt to explore a relatively new criminal offence in
the South Pacific, a current and emerging issue of which so far only Fiji has
criminalised. Other South Pacific countries should take the same approach, that
is, they should also take stricter steps towards eliminating such offences. It
would also be of benefit to the other South Pacific jurisdiction considering the
emerging Pacific financial markets.

Regulating The Capital Market of Fiji

Due to the nature of the offence and its consequences, is important to
regulate the types of transactions that are carried out in the normal course of
business in a Pacific country like Fiji. It is interesting to note that in the
South Pacific there is only one Stock Exchange and it is located in Fiji. The
name has now changed to the South Pacific Stock Exchange, which was established
by virtue of the Capital Markets Development Authority (CMDA) Act of 1996. The
main objectives of the Act are to develop and regulate the capital market.

Capital Markets are markets for medium to long term investments, i.e. 3 years
and over, in securities6, as distinct from the (shorter-term) money market. A
well-developed capital market is important to the economic development process
of Fiji because it directly affects the two major economic development goals,
mainly the mobilization of savings, and the channeling of investment into
productive enterprises. 7

The Capital Markets Development Authority Act 1996 establishes the Capital
Markets Development Authority. The CMDA Act outlines the functions and powers of
the CMDA. One of the functions among others as stated in Section 14 is "to
regulate and oversee the issue and subsequent trading both in primary and
secondary markets of capital instruments."

Provisions to regulate dealings in a company's shares emerged because of
widespread concern about the misuse of confidential information by officers of
the company, in particular, and also by their associates, their families and
friends to whom information about the company had been relayed by them.
Regulation has also purported to prevent the misuse by others outside the
company such as accountants, auditors and bankers who might equally have access
to restricted information about the company which would affect the value of its
shares on the market.

Insider dealing occurs where an individual or organization buys or sells
securities while knowingly in possession of some piece of confidential
information which is not generally available and which is likely, if made
available to the general public, to materially affect the price of the
securities. 8 The moral or ethical reasons for prohibiting such activities are
that the use of insider information is clearly unfair to those who deal with the
insider.

One of the difficulties, however, is that in many cases it is seen as a
victimless crime in that it is difficult to identify those who have lost by the
insider dealing where, as the law currently requires, it takes place on a stock
exchange dealing. 9 A more significant reason for attempting to regulate insider
trading by law is that the insider with access to confidential information is
thereby in a potential conflict-of-interest situation. Probably the primary
justification for proscribing insider trading is that it is unethical: "it is
contrary to good business ethics that a man holding a position of trust in a
company should use confidential information for his personal benefit..."10

Accordingly, any regulation designed to curb insider trading will have as its
primary objective the deprivation of any personal benefit accruing to an
insider. The subsidiary objective would be of guaranteeing fairness between the
insider and those with whom they deal by compensating the latter for any loss
attributable to the informational disparity between the parties. 11

Furthermore, such unethical conduct is likely to bring not only the
reputation of the company concerned but also that of the securities market in
Fiji, or in any other country, into disrepute with the possible risk of a
consequent adverse investment effect. One of the problems with policing insider
trading is that such transactions often fall into a large gray area, which might
or might not be legal.

Insider Trading - The Concept and Operation

Who Is An Insider?

A true insider possess unpublished price-sensitive information in relation to
securities of a company, which she or he holds by virtue of being connected with
that company. An insider is any person who is directly connected with the body
corporate. The CMDA Act provides a definition of the insider:

Section 59 (8) provides that "a person is connected with a body corporate
if, being a natural person -

(a) he is an officer of that body corporate or of a related body
corporate;

(b) he is a substantial shareholder in that body corporate or in a related
body corporate; or

(c) he occupies a position that may reasonably be expected to give him
access to information of a kind to which subsection (1) apply by virtue of
-

(i) any profession or business relationship existing between himself (or his
employer or a body corporate of which he is an officer) and that body corporate
or a related body corporate; or(ii) his being an officer of a substantial shareholder in that body corporate
or in a related body corporate."

The concept of insider
trading and its definition is no easy task. There are two approaches to the
definition of insider trading as described by Professor Hogan. 12 The first
approach may be viewed as reflecting property rights in information, and rests
upon the existence of fiduciary relationships. Thus it advocates that the
shareholders have a property interest in the information held by the
company.

Under this approach, insider trading is defined as the use of information not
publicly available, by a participant in a securities transaction whose access to
that information is derived directly or indirectly from a fiduciary relationship
which gives the participant or associate a financial advantage over others. The
financial advantage mentioned may be secured from trading in securities of the
company in which the fiduciary relationship is established or in other companies
whose market values may be influenced if confidential information held by the
initial company is acted upon. In this latter case this is most commonly
expressed in mergers and takeovers.

The second approach, which Professor Hogan describes, emphasizes equality of
access to information about a company by all participants in a securities market
and sets aside the property concept. With this approach the definition of
insider trading is the use of information, not publicly available, by any
participant in a securities transaction to the financial advantage over other
participants. It is submitted that in Fiji although the former approach
described by Professor Hogan is reflected in the elements of the offence of
insider trading, the legislature have also seen it fit to incorporate features
of the second approach as regards the disclosure requirements imposed on listed
companies. In essence the Law in Fiji relating to insider trading encapsulates
both definitive approaches by different methods but having the same aim. The aim
is to ensure a transparent and equitable market, relatively free of any misuse
of price sensitive information.

It must be stressed that this whole notion of making insider trading an
offence stems from the well known company law principle that directors owe a
fiduciary duty to the company not to make a secret profit and further, the
equitable notion that a director must not be allowed to put him/herself in a
position in which his/her fiduciary duty and personal interests conflict. It is
submitted that there is also an ethical duty for insiders to observe high
standards of commercial honor. This in turn would create confidence in the
securities market thus leading to the development of the South Pacific's only
stock exchange and also gain repute as an exotic world class immerging stock
market thus creating the potential for increased foreign investment.

It has also be defined as "trading in securities whilst in possession of
price-sensitive information which is not available to the person with whom one
is contracting in face-to-face transaction or to other participants in the
securities market at the relevant time." 13 The information may be used by the
person who has it, to buy securities at their current price before the material
information in question becomes public and causes the price to rise or to sell
securities at their current price before their value falls upon the publication
of that material information. The offence can only take place when the dealing
occurs on a regulated market, or when a professional intermediary is employed,
either as an agent or as a principal in his or her own right.

The underlying idea is that the law should extend to all those securities
that can be traded on the regulated markets, which are identified by the Capital
Markets Development Authority. Securities under the Act includes, debentures,
stocks and shares in a public company or corporation, or bonds, bills, tradable
promissory notes or drafts of any government or of any body, corporate, and
includes any right or option in respect thereof and any interest in unit trust
scheme. 14

Purely private deals may at first seem to be excluded from detection and
prosecution. This appears to mean that a private individual or a private company
who has inside information is able to deal with another private individual or a
private company who lacks information without committing an offence under the
Act. However as has been stated earlier to ensure transparency it is a strict
requirement under the CMDA Act and regulations that all transactions, dealing or
trading in any listed security shall be done on the securities exchange. This
means that all trades must be done on the Stock exchange.

The CMDA regulations do provide grounds upon which shares could be traded
"Off-Market" as private transactions but this has to have the approval of both
the CMDA and the South Pacific Stock Exchange. It may be noted that there have
to be very exceptional circumstances for the authorities concerned to approve
such "Off-Market" transactions.

Insider Trading and the Companies Act of Fiji

It may be noted that only persons trading in securities of listed companies
are subject to the insider trading sanctions of the CMDA legislation. The acts
of private individuals and/or private companies in securities not listed on the
Stock Exchange are regulated by the Companies Act of Fiji. Where such
transaction occurs, the people involved may be liable for breach of their
fiduciary duties or breach of trust.

This is stipulated in Section 403 of the Companies Act. 15 This section seems
to provide a defense where such a breach occurs.

It provides:

"403. If, in any proceeding for... breach of duty or breach of trust
against an officer of a company or a person employed by a company... it appears
to the court hearing the case that that officer or person is or may be liable in
respect of the...breach of duty or breach of trust, but that he has acted
honestly and reasonably, and that, having regard to all the circumstances of the
case, including those connected with his appointment, he ought fairly to be
excused for the...breach of trust, that court may relieve him, either wholly or
partly, from his liability on such terms as the court may think fit."

This section in the Companies Act of Fiji can be seen in relation to the
concept of insider dealing. It provides a defence for the officers or persons
connected with a corporate who breach their fiduciary duties. When a person
engages in insider trading, that person breaches the fiduciary duty that is owed
to the company he or she is working for, thus this provision of the Companies
Act can be applied to situations where insider trading occurs.

Insider dealing is a form of wrongdoing akin to breach of fiduciary duty,
since an insider takes advantage of price-sensitive non-public information
acquired in connection with his or her office. One this view, a person who
receives information from a corporate insider should be prohibited from trading
because the information is tainted by its source. However, as has been seen the
Companies act does not regulate third parties but only the officers and the
employees of the company. The underlying idea seems to be that those who trade
on securities markets should have equality of access to information and
conversely, a person who has an informational advantage should not be allowed to
exploit it by trading. 16

The Offence of Insider Trading in Fiji - The Capital Markets Development
Authority Act 1996

Certain dealings are prohibited under Part X of the Capital Markets
Development Authority Act. Insider trading is one such act, which is prohibited
under the Act. 17 The Act deals with the regulatory controls that exist in
relation to insider trading. The Act creates four offences of insider trading,
and prescribes certain civil and criminal penalties on the person who is
convicted for the offence of insider trading. The four different offences are as
follows:

(1) It is an offence for an individual who has information, as an insider
that would likely materially to affect the price of those securities, to
deal on a regulated market or through or as a professional
intermediary in securities whose price would be affected if the inside
information were made public.

(2) It is also an offence for third parties to obtain material
information, directly or indirectly, from another person who he or she is
associated with or has an arrangement for the communication of the
information with a view of dealing with securities. The third party must be
reasonably aware of the facts and the circumstances that the other person is
prohibited from dealing in those securities.

(3) It is also an offence to cause or procure another to deal
in price-affected securities.

(4) And finally the offence is committed by a person
communicating inside information to any other person. 18

The Actus Reus of Insider Dealing

The offences defined

Section 59 of the Act stipulates as follows:

"59.(1) A person who is, or at any time connected with a body corporate
shall not deal in any securities of any body corporate if by reason of
his so being, or having been, connected with the first mentioned body corporate
he is in possession of information that-

(a) is not generally available but, if it were, would be likely materially to
affect the price of those securities; and(b) relate to any transaction (actual or expected) involving both bodies
corporate or involving one of them and securities of the
other."

This section provides that a person who is connected
with the body corporate should not personally deal in any securities transaction
using the information available to him or her, which is not generally available
and which would be likely materially affect the price of those securities.

Subsection (2) of the same states in detail the circumstances in which the
offence of insider trading can be committed. It states that:

"59.(2)Where a person is in possession of any such information as is
mentioned in subsection (1) that if generally available would be likely
materially to affect the price of securities but is not precluded by either of
those subsections from dealing in those securities, he shall not deal in
those securities if -

(a) he has obtained the information, directly or indirectly, from another
person and is aware, or ought reasonably to be aware, of facts or circumstances
by virtue of which that other person is himself precluded by subsection (1) from
dealing in those securities; and(b) When the information was so obtained. He was associated with that other
person or had with him an arrangement for the communication of information of a
ki8nd to which those subsections apply with a view to dealing in securities by
himself and that other person or either of them."

This
subsection applies to the third parties who are in no way connected to the body
corporate but who have access to the material information obtained directly or
indirectly, through association and communication arrangement with another
person. The third party must be reasonably aware of the facts and circumstances
that, that person is prohibited himself or herself from dealing in those
securities. It must be proved that the third party obtained the material,
price-sensitive information with a view to deal in securities by himself/herself
and that other person or either of them.

Thus a person who has such information cannot deal in any securities,
regardless of the manner in which he or she has acquired that information.

Subsection (3) further provides that:

"59(3) A person shall not, at any time when he is precluded by subsection
(1), or (2) from dealing in any securities, cause or procure any other
person to deal in those securities."

This subsection prohibits a person connected to the body corporate from
encouraging or procuring other people to use the confidential information to
deal in the securities transaction, where that person is himself or herself
prohibited form doing the same.

In addition subsection (4) provides that:

"59(4) A person shall not, at any time when he is precluded by subsection
(1), or (2) from dealing in any securities by reason of his being in possession
of any information, communicate that information to any other person if
-

(a) Trading in those securities is permitted on any securities exchange:
and(b) He knows, or has reason to believe, that the other person will make use
of the information for the purpose of dealing or causing or procuring another
person to deal in those securities."

This subsection
prohibits the insider from communicating the material information, which has not
been published and is generally not available to other people who may then use
that confidential information to deal in securities transaction.

Section 59, subsections (1), (2), (3) and (4) prohibit a person who has
confidential information from personally or directly dealing with any
securities; prohibits third parties from obtaining information and dealing in
the securities; encouraging or procuring other people from dealing in securities
and finally communicating such information to others so that they may deal in
such securities. If a person does any of the above, he or she may, if convicted
be liable for the offence of insider dealing under the Act.

The Mens Rea for Insider Trading

The mental element of the offence of insider trading is very complex. It is
stipulated that knowledge is the most important element. The
knowledge that one is an insider and the knowledge that the information is an
inside information. The law would seem to require that the information should
relate to particular securities or a particular issuer of securities or
particular issue of securities but not to securities generally. It also requires
that the information is precise or specific, has not been made public, and if
made public would be likely to have a significant effect on the price of ant
securities. The requirements of specificity and precision are included to
exclude rumor from the ambit of information. Even so, the nature of the
information that might count as "inside information" itself remains vague and
imprecise.

Penalties Attached to the Offence of Insider Trading

The penalties attached to the offence of insider trading are provided under
section 59 (11) of the CMDA Act. These include both civil and criminal
liabilities.

It provides, in effect, that if a person contravenes the above section shall
be guilty of an offence and shall be liable, upon conviction to -

(a) the consideration for securities; or

(b) three times the amount of gain made or the loss avoided by the insider in
buying or selling the securities, whichever is greater; and in addition -

(c) in the case of a person being a body corporate, to a fine not exceeding
$20,000; in the case of any other person, including a director and officer of a
body corporate, to a fine not exceeding $10,000 or to a term of imprisonment not
exceeding 5 years or both.

Section 64 of the same Act provides that any person guilty of the offence of
insider trading shall be liable to pay compensation to any person, who entered
into a securities transaction with the offender or with a person acting on
behalf of that person and suffered a loss, by reason of the difference between
the price at which securities were transacted and the price at which they would
likely have occurred if the offence had not been committed.

The amount of compensation for which the person is liable under the above
section is the amount of the loss sustained by the person claiming compensation.
Where the harm has been done on the market as a whole, the liability shall be
the amount of the illegal gains received or the loss averted as a result of the
illegal action, as determined by the court.

This is an offence where the victims are not readily identifiable, in such
cases where those harmed cannot reasonably and practicably be determined,
payments mentioned above shall be made to the Investor Compensation Fund, which
has been established under the CMDA Act. Section 59 (12) places a time limit of
7 years for the recovery of a loss. It stipulates that an action for the
recovery of a loss shall not be commenced after the expiration of 7 years after
the date of completion of the transaction in which the loss occurred.

Once it is brought to the notice of the stock exchange that insider trading
has occurred, prosecution can be instituted and the recovery of any losses is
initiated by the stock exchange. However, it is noted that no prosecution for
any offence under the CMDA Act can be instituted except with the consent in
writing of the Director of Public Prosecutions. In addition any officer of the
Authority authorised in writing by the Chairperson can conduct any prosecution
of any offence under the Act. 19 There are other legal disqualifications if a
person or a company is convicted of insider trading.

If it is found that insider trading has occurred, the CMDA has powers in:

refusing to grant a licence;
• imposing limitations or restrictions on a licence;
• canceling or suspending a licence;
• refusing to admit a security tot he official list of securities
exchange;
• suspending trading of a security on a securities exchange; or
• requiring the removal of a security from the official list of a
securities exchange. [20]

Enforcement And Investigation

The Investigation of the offence of insider trading is encapsulated in Part
IX of the CMDA Act. Section 55 empowers the Capital Markets Development
Authority to appoint investigating officers to carry out investigation of any
offence under the Act.

The Powers of the investigating officers appointed by the CMDA are stipulated
in sections 56 to 58, which may be summarized as follows:

(a) Authority to enter any place or building or by force if necessary upon
production of a search warrant issued by a judge;

(b) Inspect and make copies of any book, minute book, register or
document;

(c) Make an Application to the High Court for a warrant to search, seize,
take possession of, and detain any object, article, material, thing, accounts,
book including any travel or personal document which may be used as
evidence;

It is to be noted that failure to comply with the investigating officers
directives as regards production of documents or the obstruction of their
exercising the powers aforementioned, persons found guilty would be liable upon
conviction to a fine of $5,000 or imprisonment for a term of 3 years or
both.

(d) May grant permission to any person (third party) to inspect any account,
book or document seized and taken into possession of by the investigating
officer;

(e) May by way of notice compel any person acquainted with the facts or
circumstances of the case to appear before them to be examined orally upon which
the statements so made are reduced to writing and the statement may be signed by
the compelled party. It is interesting to note that the CMDA Act specifically
states that any statement made and recorded are admissible as evidence in any
proceedings in any court.

(f) It can also be noted that it is an offence for a person who fails to
appear at the oral hearing or furnishes misleading or false information to the
investigating officers. Such persons would if found guilty be liable to a fine
of up to $5,000 or to imprisonment for a term of up to 3 ½ years or
both.

Since no one has been charged yet for an offence of insider trading it is
interesting to ponder upon whether such persons would be able to exercise their
right to silence to prevent self incrimination if that be the case and also
whether the person so compelled has a right to legal counsel present at this
investigation stage. It is submitted that the Judges Rules should be used as a
guide to the Investigating officers when exercising their powers under this
provision to ensure transparency and fairness.

However, as has been seen a person accused of insider trading is subject to a
markedly different investigative regime to that accused of almost every other
type of criminal offence. The CMDA Act specifically removes the right of silence
in insider trading. [21] It is suggested that due to the secretive nature of most
insider trading activity, the normal due process investigative model in Fiji
would be ineffective as regards obtaining evidence required to bring a
successful prosecution.

The Securities Exchange, that is, the South Pacific Stock Exchange (SPX)
(formally the Suva Stock Exchange - SSE) is also empowered under the CMDA Act to
make rules for the conduct of its business. There are two main set of rules
which regulate the operations of the Securities Exchange, they are the
"Listing Rules" which regulate the affairs of listed companies and the
"Business Rules" which inter alia, regulate the affairs of the Exchanges
members who are basically stock brokers, dealers and investment advisors. The
South Pacific Stock Exchange Business Rules requires its members to keep
all its financial and customer records, customer agreements; investment advice
records; customer history, personnel records of all employees; and all
correspondence for a period of seven years.

The South Pacific Stock Exchange, like the Capital Markets Development
Authority has under its business rules the powers to inspect, or appoint
an agent to inspect, the records of the member. The SPX also has unrestricted
access, with or without notice, to members' premises and records, to review
compliance with The CMDA Act and the rules and to investigate suspected breaches
of The CMDA Act and the rules.

The South Pacific Stock Exchanges Listing Rules require stringent
disclosure requirements by listed companies, these are contained in the
section entitled "Continuing Listing Requirements". The provisions in these
rules ensure or at least seek to ensure that information that would materially
affect the price of securities is disclosed to the Exchange promptly even before
a public announcement is made to shareholders.

As regards mergers, takeovers, acquisitions and dividend declarations be it
interim or final, this information has to be disclosed to the Exchange no sooner
after a board meeting is convened to consider the issue whether or not the
merger, take-over, acquisition, or dividend declaration does in fact
materialize. It may also be noted that there is an automatic investigation
conducted by the Exchange when there is a price change of + or - 5% in
securities of a listed company. This among other uses would be an indicator of
possible insider trading.

This indirectly assists the Exchange and the CMDA in its continual market
surveillance, thus enabling detection of the misuse of inside information by
insiders or their cohorts for financial gain. It may be noted that
non-compliance with the continuing listing requirements of the Exchange imposes
rather punitive fines and other disciplinary recourses. In all, the
investigative machinery of the Capital Markets in Fiji as regards insider
trading is explicit, however the detection of the same is rather dependent on
external factors such as abnormal price changes in securities.

It is important to note that as provided by section 73, the CMDA Act is
paramount if in conflict with any other law or Act and this includes the
Companies Act. If for example insider trading has occurred within the CMDA Act,
the defendant cannot rely on section 403 of the Companies Act and use it as a
defence. He or she will not be allowed to say that the price sensitive
information was passed to another person or used to trade in securities, and
whatever was done was done honestly and reasonably. They will not be permitted
to fall back on the Companies Act. It is thus submitted that the defence of
Section 403 if the Companies Act of Fiji regarding breach of fiduciary duty and
trust cannot be used as a defence in an insider trading prosecution.

Observations and Conclusion

As has been discussed, the crime of insider trading only applies to insiders
who trade in securities that are listed on a securities exchange. Thus, insider
trading concerning the securities of unlisted companies would still be governed
to some extent by the Companies Act of Fiji. The background upon which the
offence of insider trading operates has been described, that is the capital
markets and the stock exchange. The concept of the offence and its operation has
also been outlined and the elements of the offence described and analysed. It
was noted that there are basically four heads or actus reus upon which the
offence can be prosecuted, that is, dealing by any person connected with a body
corporate, third parties who obtain price sensitive information, causing or
procuring another to deal in securities, and finally the communication by an
insider to an outsider of material information. The mens rea was generally that
of knowledge, whether actual or implied, that one is an insider and that the
information concerned was price sensitive.

The investigation and enforcement of the offence has also been discussed and
it was noted that the investigation of the offence was substantially different
from that of other criminal offences as the due process right to silence is
specifically abrogated by the CMDA Act. That is, persons suspected are
compellable during the investigation stage to appear for an oral hearing or
inquiry and statements elucidated from this hearing is admissible in court as
evidence.

The other significant factor was the "off-market" private transactions in
listed securities are prohibited save for exceptional circumstances. Aside from
the provisions stipulated in the CMDA Act for investigation by investigating
officers with their various powers, it was also noted that the securities
exchange has provisions in its business rules and to some extent under its
listing rules, the power to enter premises and investigate any suspected
breaches of the Act.

In all, the legislative provisions relating to the offence of insider trading
and its investigation is rather wide and theoretically ineffective. To date
there has been no prosecution brought in Fiji as regards the offence. However,
given the particularities of a small island country like Fiji with its intricate
and diverse networks it would not be an overstatement to suggest that there have
already been instances of insider trades. It may be noted further that the use
of a corporate entity to carry out such activities would be the most ideal
façade behind which insiders could deal, procure, or communicate such
price sensitive non-public, material information for financial gain or to reduce
financial loss in the Capital Markets of Fiji.

It is envisaged that with awareness of the criminal offence of insider
trading and the continued market surveillance conducted by both the CMDA and the
Stock Exchange in Fiji, such activities would be minimal. It was also noted that
the penalty imposed by the law was two fold, that is, there is a criminal
offence upon which a substantial fine or imprisonment is prescribed and there is
also the civil remedy available to compensate the victim of the crime three
times the gain procured. It is submitted that the legislation, criminalising
insider trading in Fiji is robust.

There are however, practical implementation problems. So far in Fiji there
has not been a single reported case to come under the Act. That is to say that
there has not been any successful prosecution of insider trading under the CMDA
Act, and to think that insider trading is not occurring in Fiji would be
cynical. In conclusion, it is submitted that the strict investigation and
enforcement of this crime would ensure not only an open and transparent and
equitable Capital Market in Fiji, but it would be a deterrent to insiders who
wish to breach their position of trust and fiduciary duty thus paving the way
for a high standard of ethical business practice in the securities market.

REGULATION OF INSIDER TRADING IN AUSTRALIA

Introduction

Insider trading has been the subject of concern in Australia for at least the
past 20 years. There have been a large number of responses from the officials,
resulting from the booming market conditions. However, none of these responses
to insider trading have significantly affected the activity of insider trading
or led to more efficient law enforcement procedures.

The extent of insider trading in Australia was highlighted in the 1974 report
of Australian Securities Markets and their Regulation and the Senate Select
Committee on Securities and Exchange (the Rae Committee) During the 1980's the
Australian community and the officials renewed their concerns about insider
trading. One of the major reasons was the perceived, undesirable impact that the
widespread presence of insider trading had upon the international reputation of
Australian securities markets.

In October 1987, the Australian markets crashed. The Federal Attorney General
in February 1989 requested the House of Representatives Standing Committee on
Legal and Constitutional Affairs (the Griffith Committee) to conduct an inquiry
into insider trading and other forms of market manipulation. After 8 months the
report was tabled and it confirmed the widespread nature of insider trading and
a call for legislative reform was made. [22]

In Australia there existed a legislation regulating insider trading, this was
the Securities Industry Act 1970 (N.S.W.) which was later replaced by the
Securities Industry Act 1980. In the 1970 Act, it was section 75A, which covered
insider trading, and in the 1980 Act it was replaced by section 128. This was
later succeeded by section 1002 of the Corporations Law. After the release of
the reports in 1990 the Government endorsed the recommendations made by the
Committee. In the same year the Federal Attorney General released an Exposure
Draft of the proposed new insider trading legislation. In the draft it was
proposed that section 1002 be repealed and replaced by 12 new sections which
would be more effective then section 1002.

In Australia there have been several cases [23], which came before the courts
where charges were laid under the existing legislation. Despite the finding that
insider trading had occurred, it was difficult to justify those findings. These
cases illustrated the perversity of this body of law and the also the inability
of the courts to function as vehicles of law reform in this area. [24]

Insider Trading - The Concept, Offence and Operation in
Australia

Who is an Insider?

Section 1002G (1) of the Act stipulates that:

"(a) An insider is a person who possesses information that is not general
available but, if the information were available, a reasonable person would
expect it to have a material effect on the price or value of securities of a
body corporate; and

(b) The person knows, or ought reasonably to know, that;

(i) the information is not generally available; and
(ii) if it were generally available, it might have a material effect on the
price or value of those securities;

The following subsections
apply."

This sub-section defines who an insider is, and such a person is one who has
information which is not generally available and if it were made available would
have a material effect on the price or value of the securities of a body
corporate.

Under the Fiji Act an insider is a person who is connected with a body
corporate and in that capacity has acquired information which is not generally
available. The person has to be directly connected to the body corporate to come
under the ambit of the Act. Whereas in Australia the person need not be directly
connected to the company as long as he or she possess the information which is
likely to have a material effect on the securities in the market.

Sub section 2 contains the elements of the prohibited conduct and stipulates
that:

"The insider must not:

(a) Subscribe for, purchase or sell, or enter into an agreement to subscribe
for, purchase or sell, any such securities; or
(b) Procure another person to subscribe for, purchase or sell, or to enter into
an agreement to subscribe for, purchase or sell, any such
securities".

This provision is similar to the one if Fiji in that
the insider is prohibited from dealing personally in securities using the price
sensitive information and also prohibited from influencing third parties to
deal, purchase or sell or enter into agreements and using the information for
their benefit.

Furthermore, subsection 3 provides that:

"Where trading in the securities referred to in subsection (1) is
permitted on the stock market of a securities exchange, the insider must not,
directly or indirectly, communicate the information, or cause the information to
be communicated, to another person if the insider knows, or ought reasonably to
know, that the other person would or would be likely to:

(a) Subscribe for, purchase or sell, or enter into an agreement to subscribe
for purchase or sell, any such securities; or(b) Procure a third person to subscribe for, purchase or sell, or enter into
an agreement to subscribe for, purchase or sell, any such
securities."

The insider must not communicate the price
sensitive information, which she or he has acquired during the course of
business, either directly or indirectly to another person if she or he knows
that the other person is likely to use the information to buy, sell or subscribe
for any such securities.

In her paper on insider trading, the Commonwealth Director for Public
prosecutions summarised the elements of the offence of insider trading under
section 1002G can be summarised as:

(i) A person possesses information

(ii) That is not generally available

(iii) If the information were generally available, a reasonable person would
expect it to have a material effect on the price or value of securities of a
body corporate

(iv) The effect will be material if the information would or would be likely
to influence persons who commonly invest in securities in deciding whether to
buy, sell or subscribe for the first-mentioned securities

(v) The person in possession of the information knows or ought reasonably to
know that the information is not generally available, it might have a material
effect on the price of those securities

(vi) The effect will be material if the information would, or would be likely
to, influence a person who commonly invests in securities in deciding whether to
buy, sell or subscribe for the securities

(vii) The person buys, sells or subscribes for any such securities. [25]

It seems that under the Australia Act, it is not necessary to prove that the
defendant used the information to trade. It is only necessary to prove that he
or she was in possession of such price sensitive information and did in fact
trade on the basis of that information. [26]

In her paper she outlined the things that the prosecution has to prove in
insider trading prosecutions. In relation to the information it has to be proved
that the information was inside. It must be shown that the information was not
generally available and that a reasonable person (the investor) would expect it
to have an effect on the price or value of the shares. In addition to that it
has to be shown that the effect would be material, that is the information would
or would be likely to influence a person who commonly invests in securities in
deciding whether to buy or sell the shares.

It is submitted that under the Australian Corporations Law, it is not
necessary to prove that the defendant used the information to trade. It would be
sufficient to prove that the defendant was in possession of such price
sensitive, inside information and did in fact trade.

According to the Commonwealth Director of Public Prosecutions in Australia,
Ms. June Phillips it was stated that the prosecution, to establish an offence of
insider trading under the Act had to prove the following:

The Actus Reus

In relation to the information, it has to be proved that the information was
inside information. It must be shown that the information was not generally
available and that a reasonable person (the investor) would expect it to have an
effect on the price or value of the shares.

In addition to that it has to be shown that the information would or would be
likely to, influence a person who commonly invests in securities in deciding
whether to buy or sell the shares. [27]

The Mens Rea

To prove the mental element of the offence, the prosecution has to prove that
the defendant knew or ought reasonably to now that:

(a) The information is not generally available,

(b) That the information might have an effect on the price or the value of
the shares, and

(c) That a person who commonly deals in securities might be influenced by the
information in deciding whether to buy the shares and/or convertible notes.
[28]

Penalties and Enforcement

Actions nay be brought against the insider who subscribed for or opted to
subscribe for securities or who sold securities as well as "any person involved"
in the contravention. Action may also be brought to recover the loss suffered by
the buyer or by the seller of securities or by the corporation that issued the
securities which were subscribed for, or agreed to be subscribed. [29]

In insider trading cases the courts in Australia have certain powers which
are prescribed under the Act. Where in a proceeding instituted under this Law,
the court finds that a contravention of section 1002G has occurred, the court
may, in addition to any other orders that it may make under any other provision
of this Law, make such order or orders a it thinks just, including, but without
limited the generality of the above, any one or more of the following
orders:

(a) an order restraining the exercise of any voting or other rights attached
to shares;

(b) an order restraining the exercise of any rights attached to securities
other than shares;

(c) an order restraining the issue or allotment of shares;

(d) an order restraining the issue or allotment of securities;

(e) an order restraining the acquisition or disposal of securities;

(f) an order directing the disposal of securities;

(g) an order vesting securities in the Commission;

(h) an order canceling an agreement for the acquisition or disposal of
securities;

(i) an order canceling a securities licence;

(j) for the purpose of securing compliance with any other order made under
this section, an order directing a person to do or refrain from doing a
specified act. 30

When compared to the powers vested in the courts in Fiji, the courts in
Australia have more powers in relation to the offence of insider trading. In
Fiji it is the CMDA which conducts investigations and deals with the offenders,
whereas in Australia the courts seem to have more power in regard to insider
trading offences.

It is submitted that the laws regarding insider trading offences be hardened
in order to remove any loopholes using which the offenders may escape liability
for the offence. This will then ensure that it is easier for the prosecution to
bring successful prosecutions against insider traders.